Innovation
An invention is the creation or discovery of new ideas for products or processes.
Innovation is the practical application of new inventions into marketable products.
Role of innovation in business success
Businesses must be able to develop new products, materials, systems and processes and
improve existing ones in order to grow and to survive. A business that fails to innovate can
run the risk of losing ground to competitors, losing key staff, or simply operating
inefficiently.
Innovation is not only about designing a new product or service to sell, but can also focus on
existing business processes and practices to improve efficiency, find new customers, cut
down on waste and increase profits.
Successful businesses not only respond to their current customer or organisational needs, but
often anticipate future trends and develop an idea, product or service that allows them to meet
this future demand rapidly and effectively. Innovation helps the business stay ahead of its
competition as markets, technologies or trends shift.
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Constantly innovating and improving business practices is also likely to help attract better
staff members and retain existing staff, which is crucial to the long-term health and
performance of a business.
Types of Innovation
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Breakthrough innovation ~ an “out of the blue” solution or discovery that cannot be
compared to existing practices or techniques. These innovations use new technologies and
create new markets.
Cost-reducing innovation ~ improved processes that reduce the cost of production for a
business or industry.
Process innovation ~ changes to the way production takes place.
Product innovation ~ new creations or the development and improvement of existing
products. This type of innovation is sometimes called incremental innovation. It is
evolutionary in nature and generally leads to substitutes to existing products. These
innovations are generally in response to consumer demand.
Research and Development
The pace of technological change, combined with the rising wants and spending power of
consumers, has forced businesses to respond by investing in research and development
(R&D). This is the scientific research and technical development of new products and
processes.
Research is the investigation and discovery of new ideas in order to solve a problem or create
an opportunity. Methods used to generate new ideas include laboratory research, product
evaluation of a business’s own and its competitors’ products, and focus groups designed to
think up or respond to new ideas.
Development involves changing ideas into products, materials, systems or processes. One of
the problems with development is the time scale involved. Some projects take many years to
complete and success cannot be guaranteed.
Factors affecting the level of R&D and innovation by a business
 The nature of the industry ~ rapidly changing technologies in industries such as
pharmaceuticals, computer software and hardware and motor vehicles call for substantial
investment in R&D by leading firms. Other businesses such as hotels and hairdressing
would need to spend far less as the scope for innovation is more limited.
 R&D spending plans of competitors ~ in highly competitive markets, it is necessary for a
business to innovate as much as or more than competitors if market share is to be
maintained. However, a monopoly may limit R&D spending if it believes that the risk of a
more technically advanced competitor entering the market is limited.
 The risk profile or culture of the business ~ the attitude of the management to risk and
whether shareholders are prepared to invest for the long term will have a significant effect
on the amount a business can on R&D.
 Government policy towards grants to businesses and universities for R&D programmes,
and the range and scope of tax allowances for R&D will influence a firm’s decisions
about its level of R&D.
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Process of Research & Development
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Generate ideas
Screen ideas and test concepts
Prepare product design brief
Make and test prototypes. These may be discarded, adapted or adopted
Test marketing
Full-scale production
Promote and launch the product
R&D does not always lead to innovation. It is expensive and has an opportunity cost.
Inventions do not always translate into products that consumers will buy in a quantity that
will make their production profitable.
Cultures favouring innovation
 Risk-taking must be rewarded ~ employees should be encouraged to take risks and
attempt initiatives that are beyond the scope of their firm’s traditional operating
boundaries.
 Mistake-making must be tolerated ~ in order to challenge status quo and find better ways
to do things, mistakes will be made.
 Communication must be open ~ everyone in the business should be encouraged to submit
suggestions for improvement and they should be taken seriously.
Strategies to encourage innovation
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Give workers greater freedom and resources to explore new ideas. This will encourage
them to follow ideas that interest them.
o An advantage of this is that workers might initiate fresh ideas that have true
potential. This might lead to new products and an increase in revenue.
o Another advantage of allowing workers greater freedom in their work is that it will
increase motivation, because they feel more valued. This, in turn, may increase
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productivity.
A disadvantage is that profitability could fall if ideas do not relate to the firm’s
market objectives. This means that the firm’s direction may become confused and
lack focus.
Encourage interdepartmental innovation discussion. People sharing views may lead to
new ideas.
o An advantage of interdepartmental discussion is that it would allow the sharing of
ideas. This will allow the creation of products that may not have happened
previously. This may improve revenue in the longer term.
o A disadvantage is that some workers may feel the meetings are unnecessary, and
this might reduce motivation. This will raise staff expenses.
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Opportunities and risks of innovation
Innovation gives the business the opportunity to:
 Develop unique products
 Gain competitive advantage
 Provide alternative and possibly more sustainable income streams
 Identify new opportunities
 Improve efficiency of production processes
 Enhance the business’s reputation
These are offset by challenges and costs:
 The need for financial investment ~ in R&D, extra staffing costs
 Long timescales
 Uncertain outcomes
 The chance that conditions may change during the R&D process, such as competitors
launching a similar or better innovation
 Possibility of failure and the associated impact on reputation
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